On September 14, 2024, the IRS implemented a pause in processing new Employee Retention Tax Credit (ERTC) claims, effective until at least the beginning of 2024. This action was taken in response to a significant surge in claims, with 540,000 out of a total of 3.6 million claims received in the past 90 days, as the Wall Street Journal reported. Claims submitted to the IRS before September 14, 2023, will continue to be processed, albeit slower.
Additionally, the IRS now allows for the withdrawal of pending claims if employers no longer believe their business qualifies. Since the program’s inception in 2020, the IRS has conducted 252 investigations related to $2.8 million in ERTC claims.
The Employee Retention Tax Credit (ERTC), also known as the Employee Retention Credit (ERC), represents a refundable credit accessible to eligible businesses that paid qualified wages from March 12, 2020, through the program’s conclusion, aimed at retaining their workforce during the height of the COVID-19 pandemic.
Initially introduced by the Coronavirus Aid, Relief, and Economic Security Act (CARES) in March 2020, this tax credit underwent subsequent amendments through the Consolidated Appropriations Act of 2021, the American Rescue Plan Act (ARPA), and the Infrastructure Investment and Jobs Act. This article will provide insights into eligibility criteria, qualified wages, the mechanics of the credits, and more. It will also delineate the impact of specific laws and dates on what businesses can claim, with additional considerations such as receiving a Paycheck Protection Program (PPP) loan affecting the credit’s eligibility.
ERC Deadlines: Can You Still Apply for the Tax Credit?
Yes, businesses can still apply for the ERTC. Despite the official conclusion of the ERTC program, businesses can retroactively claim the credit.
Businesses have up to three years from the program’s end to conduct a review to determine if they meet the eligibility criteria. The deadline for filing amended returns for the second, third, and fourth quarters of 2020 is April 15, 2024, while the deadline for eligible quarters in 2021 is April 15, 2025. For most businesses, the credit could be claimed on wages paid until September 30, 2021, with certain businesses having until December 31, 2021, to have paid qualified wages. It is important to note that businesses can no longer pay wages to apply for the credit. The ERC is not a loan; it is a tax credit based on payroll taxes previously remitted, and businesses are not required to repay the funds they receive.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable credit that businesses can claim for qualified wages, including certain health insurance costs, paid to employees. Various laws passed between March 2020 and November 2021 altered requirements and eligibility criteria for the employee retention tax credit. Here is a summary of the key changes introduced by each law:
CARES Act of 2020 and ERC
Eligible employers included those operating a trade, business, or tax-exempt organization.
The credit was taken against the employer’s portion of Social Security tax and could be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually, for wages paid between March 13 and December 31, 2020.
Consolidated Appropriations Act of 2021 and ERC
- Employers who qualify, including PPP recipients and specific organizations, can claim a credit against 70% of qualified wages paid.
- The wages that qualify for the credit are now $10,000 per employee per quarter.
American Rescue Plan Act of 2021 and ERC
The credit remains at 70% of qualified wages, with a limit of $10,000 per quarter per employee.
Recovery Startup Businesses were eligible through the end of 2021 and could claim up to $50,000 for the third and fourth quarters of 2021.
How Does the Employee Retention Credit Work?
The ERC is a refundable tax credit based on the payroll taxes your business paid. While new laws enacted during the pandemic introduced some changes, these changes did not affect the credit amount.
The American Rescue Plan Act shifted the nonrefundable portions of the employee retention tax credit to be claimed against Medicare taxes instead of Social Security taxes, but this change applied only to wages paid after June 30, 2021, and did not alter the overall credit amount.
How to Apply for the ERTC Retroactively
IRS Notice 2021-20 offers guidance for employers seeking to claim the Employee Retention Tax Credit. However, this notice addresses explicitly the credit as it applies to qualified wages paid between March 12, 2020, and September 30, 2021. Moreover, most of the notice reiterates the previously published ERTC FAQs on the IRS website.
The notice also guides how employers who received a PPP loan can retroactively claim the employee retention tax credit. To claim the credit for past quarters, employers must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the relevant quarter(s) in which the qualified wages were paid. The IRS includes three examples (Q&A No. 57) to illustrate this process.
Additionally, IRS Notice 2021-20 contains seven examples (Q&A No. 49) depicting scenarios in which an employer with a PPP loan determines which wages, if any, are eligible for the tax credit. The eligibility of wages largely depends on how the qualified wages were reported on the PPP loan forgiveness application.
The IRS emphasizes a crucial point regarding expenses eligible for PPP forgiveness—they must be included in the loan forgiveness application, or they cannot be factored in afterward. This underscores the importance of meticulously documenting all eligible expenses, including payroll costs and non-payroll expenses such as utilities, rent, and operational expenditures, among others.
Ensuring that all eligible expenses are included in your PPP loan forgiveness application allows you to maximize the qualified wages available for the Employee Retention Tax Credit (ERTC). This strategic approach helps businesses take full advantage of available tax credits and strengthens financial resilience during challenging times.
Solutions by Mike Miller, CPA 